Jan 11 (Reuters) - Wells Fargo & Co on Friday said
fourth-quarter profit rose 24 percent to a record high as the
bank set aside less money to cover bad loans and made more fees
from mortgages.

But lending margins declined and the bank made fewer
mortgage loans than in the third quarter, and its shares closed
down 0.8 percent at $35.10.

Wells is the first big U.S. bank to report fourth-quarter
results, and its report reflects how banks are relying more on
fees from mortgages and service charges to increase revenue, and
less on interest income. Low interest rates are pressing on the
profit banks make from interest.

But fees from mortgages may help the bank less in the
future. The bank's pipeline of applications for home loans that
have not yet closed was $81 billion at the end of the fourth
quarter, down from $97 billion at the end of the third quarter.
Wells issued $125 billion in mortgages during the fourth
quarter, compared with $139 billion in the third quarter.

In an interview, Wells Chief Financial Officer Tim Sloan
said the bank made fewer mortgage loans in the fourth quarter
mostly due to a decision to stop making loans through brokers.
The volume of loans under way but not yet closed is still among
the highest in the bank's history, he said.

"Assuming rates stay about where they are or even pick up
just a little bit, it's reasonable to assume we will still have
healthy, strong originations in the mortgage business," Sloan
said.

Wells, the fourth-biggest U.S. bank and the nation's largest
home lender, said fees from mortgages climbed nearly 30 percent
from a year ago to $3.1 billion as homeowners continued to
refinance their homes at low interest rates.

The Mortgage Bankers Association has forecast that banks
will make fewer loans in 2013 than 2012, and then fewer again in
2014, with a drop in refinancings more than offsetting an
increase in loans to purchase homes.

Wells' lower mortgage applications and originations are "a
wake-up call to the investment community that this isn't going
to go on forever," said Scott Siefers, analyst with Sandler
O'Neill. "It's a mounting headwind no doubt about that."

Wells Fargo's net interest margin - a closely watched
measure of loan profitability - fell to 3.56 percent from 3.66
percent in the third quarter, but the decline was less severe
than the drop from the second to the third quarter. Banks are
seeing their margins shrink as older loans with higher interest
rates are paid down.

Wells Fargo provision for loan losses fell to $1.8 billion
from about $2 billion as borrowers continued to do a better job
of making their payments.

Net income was $5.1 billion, or 91 cents a share, compared
with $4.1 billion, or 73 cents a share, a year earlier.

The latest results included a previously announced pre-tax
charge of $644 million for Wells Fargo's share of an $8.5
billion settlement that ends a U.S. government-mandated review
of financial crisis-era foreclosures. [ID: nL1E9C73TJ]

Analysts' average earnings forecast on Friday was 89 cents
per share, excluding gains from equity investments and expenses
from several one-time items, according to Thomson Reuters
I/B/E/S. On that basis, Wells earned 92 cents, according to
I/B/E/S.

Wells Fargo's total loans increased 2 percent from the third
quarter to $799.6 billion, helped by a decision to hold onto
$9.7 billion in mortgages that it could have sold to mortgage
finance companies Fannie Mae and Freddie Mac
.

That move cost the bank $340 million in fees in the fourth
quarter - mortgage fees it would have received from Fannie and
Freddie - but will provide it with interest income over the
longer term. Wells took a similar action in the third quarter,
saying the mortgages would provide a better return than other
investments it could make.

With over 30 percent market share through the first nine
months of 2012, Wells was the top U.S. mortgage lender,
according to Inside Mortgage Finance, a publication that tracks
the industry. JPMorgan Chase was second with 10 percent.

Wells Fargo's total fourth-quarter revenue rose 7 percent to
$21.9 billion, driven by an increase in fees. The bank, which
has added new monthly fees on checking accounts that were once
free, brought in $159 million more in service charges from
deposit accounts in the fourth quarter than a year ago. Income
from interest fell.

Total expenses were up 3 percent to $12.9 billion. The bank
blamed the foreclosure-related charge and a contribution to its
charitable foundation.

Wells repurchased 42 million of its shares during the
quarter and has a contract to buy back another 6 million in the
current quarter. Big U.S. banks are undergoing Federal Reserve
stress tests that will determine whether they can raise
dividends and buy back more shares this year.

In a conference call with analysts, Sloan said the bank had
asked the Fed for permission to return more capital to
shareholders in 2013 than in 2012.